Question

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $800,000. Robin's basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non pro rata to Robin, a related person.

a. No loss recognized by Cardinal and a basis to Robin in the land of $1,000,000.
b. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $800,000.
c. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $1,000,000.
d. No loss recognized by Cardinal and a basis to Robin in the land of $800,000.

Answer 1

Cardinal Company does not recognize any loss in the exchange of land with Robin during the liquidation, and Robin's basis in the land is the fair market value, which is $800,000.

Step-by-step explanation:

When Robin transferred her 60 percent interest in Cardinal Company as part of a complete liquidation, both the company and Robin had tax implications to consider. Since the land was distributed to a related person and as part of the liquidation process, Cardinal Company cannot recognize a loss on the distribution even if the fair market value of the land is less than its basis in Cardinal's books. Internal Revenue Code generally disallows recognition of loss on distributions to related parties in liquidations.

Therefore, the correct answer is that Cardinal does not recognize any loss in the exchange, and Robin's basis in the land will be its fair market value, which is $800,000. This is because the basis of property received in a liquidation is generally the fair market value of the property at the time of the distribution.